America’s Lesson for the NHS

The political class in the United Kingdom has taken a good deal of umbrage at the unkind comments about the National Health Service made in the context of the American healthcare debate. Please accept my apologies on behalf of my countrymen, who are looking at the NHS through the prism of the American experience and without the historical context of British health before the NHS.

That said, there is also a tremendous amount of misinformation in Britain about the American healthcare system. The fact is, both America and Britain are going to have to change the way they provide healthcare but through evolution, not sudden or drastic reform.

The root of the misunderstanding on both sides of the Atlantic involves the way that healthcare is rationed. “Rationed” is a dirty word in some quarters, but we economists have it drilled into our thinking from the first week of our freshman year in college. Goods are scarce. Societies can ration scarce goods by price, or by regulation, or by queueing, or can choose not to ration by making them almost free and thereby drive ever increasing amounts of resources into massive consumption of the free goods.

The real issue in America is not that we ration by price–by and large we do not. Our bigger long-term problem is that we effectively do not ration at all.

The negative view of the NHS being circulated by some in America highlights the adverse effects of rationing by regulation and queueing that occurs in Britain without giving the whole picture. It also ignores the enormous benefits the NHS has brought to British healthcare in the six decades of its existence and just how scarce access to even basic healthcare was in Britain before the NHS.

The negative view of American healthcare held in Britain also comes from a misperception of the American choice on rationing. It is widely assumed that America rations healthcare by price and that to be uninsured means not to have access to healthcare. The fact is that of all the options mentioned above, America has by and large chosen not to ration healthcare by either price or regulation or queueing, thereby driving enormous resources into the basically unrationed healthcare sector.

The contrast is clear in the numbers. America spends 16% of its GDP on healthcare. Britain spends 8%. The difference springs from the historical contexts in which each system evolved. The NHS grew up in an atmosphere of severe scarcity. Britain had been historically underserved in a whole variety of medical measures: doctors, hospital beds, technology and the country itself faced a severe budget constraint, rationing of a wide variety of goods and destruction of much of the industrial base.

Making do was the watchword of the NHS in the beginning and, as a competitor for the scarce resources of the state, still is today.

By contrast, additional healthcare spending in America was always viewed as a way around scarcity. The initial provision of health insurance occurred during the second world war to avoid wage and price controls. Firms found they could abide by the government-imposed wage limits and still attract the workers they wanted by offering health insurance on the side as a “fringe benefit” that for some unknown reason the wage control bureaucracy didn’t count as pay.

Lyndon Johnson added Medicare–government health insurance for those over 65. Today Medicare is an entitlement. This means it isn’t subject to an appropriation by Congress–the spending is automatic and unconstrained. Whatever bills Medicare’s beneficiaries run up, the government will pay without so much as a by-your-leave by Congress.

We have now added Medicaid–which covers medical insurance for those who are classified as poor or near poor. The scheme covers a family of four with an income of up to $65,000 (£39,000), depending on the state. That is roughly twice the median family income in the UK. There is also SCHIP, the State Children’s Health Insurance Program, which has grown eightfold since its inception 12 years ago, covering children in families earning up to $65,000 who have no family-based insurance.

All told, 85% of the American population has medical insurance coverage and often it is quite generous. For example, the average health insurance premium for a state employee with a family is $10,000 per year to cover relatively healthy middle-aged workers and their children. Average spending for all Americans is roughly $8,000 per year per person. By contrast, per capita spending in the United Kingdom is about $3,500 per year.

Moreover, being uninsured does not close the door to receiving healthcare. The Washington Post recently estimated that the average healthcare spending by the uninsured was 50%-70% of that of the insured population, meaning the average uninsured person in America consumes more healthcare spending than the average resident of the UK, especially when one adjusts for age.

Some of the uninsured simply pay out of pocket. But, if you are uninsured and indigent, you show up at the emergency room. It is illegal to refuse treatment in all 50 states. This creates an enormous crosssubsidy issue as hospitals and other medical service providers must push this unreimbursed cost onto their insured customers.

Ending this cross-subsidy is one reason why doctors, drug companies, hospitals and the insurance industry are all advocates of “universal coverage”. Cross-subsidisation is inefficient, but it also means that everyone in America gets cared for, whether insured or not.

So the real issue in America is not that we ration by price–by and large we do not. Our bigger long-term problem is that we effectively do not ration at all. Healthcare spending in America is growing between two and four percentage points faster than GDP. Washington views this as a long-term political challenge. As an economist, I view it as a long-term mathematical impossibility. One cannot have a component of GDP growing faster than GDP indefinitely.

With this as a backdrop, the basic idea for Obama-Care was like the adage of the businessman who was losing money on every unit he produced and proposed making it up on volume. Sure, providing insurance for the uninsured would probably improve their health outcomes and it would help eliminate all the cross-subsidisation. But bringing the 15% of the population who now consume 50%-70% as much as the rest of us up to par means adding 6% to the national health bill. The official scorekeepers for the government’s share at the Congressional Budget Office came in at over 8%, since there would also be some shifting of people who now get private insurance to the government.

This is where all that talk about the NHS came in. To cut costs, the administration and its congressional supporters proposed doing some real, but fairly modest, non-price rationing. The biggest losers, since they are also the biggest consumers, were the elderly. And, relative to America, the NHS does quite a bit of queueing and regulatory denial of healthcare procedures for the elderly. So it became a natural target.

This does not mean the NHS is not “cost-effective”. That is a judgment call, to be discussed below. But, if you have grown up in a system that in effect has no rationing and you are told that some non-price rationing is on its way, it really doesn’t matter whether it is cost-effective or not for the government budget. It means you are going to get less late-in-life care than you thought, whether you like it or not.

A fair question is what we Americans get by spending twice the share of GDP on healthcare than does the United Kingdom. Your politicians, your NHS and American politicians who admire your system would like us to believe that the answer is “nothing at all”. That may provide political comfort, but it is simply not credible. Nor does it comport with the facts. Again, that is different from saying: “We’ve made the right choice and you haven’t.” An 8% of GDP gap in spending is a huge sum, the equivalent of 10 Iraq wars, if you like, or roughly the total collections from the personal income tax. So we ought to get quite a bit of extra healthcare for that kind of money. In many areas the systems are equivalent but there are three standouts.

First, there is much less queueing. Any insured American can get an appointment with his or her physician at a mutually agreed time with almost no waiting. Perhaps not on Sunday or at 3am (then you have to go to the emergency room). But you don’t spend hours sitting around a waiting room and we Americans are a very impatient people. In addition there is no bending of the rules by keeping ambulances outside hospitals to meet the average wait time between being admitted and getting service or running a “waiting time” version of triage to meet bureaucratic goals. Again, the value of this is a matter of judgment and we may have culturally different answers. Contrast getting a cab at busy times in Manhattan with the nice neat queues you have in London.

Second, and this is going to be painful for the NHS’s supporters to admit, we Americans have much better cancer survival rates. A study of cancer survival rates in 31 countries published last year in The Lancet bears this out. America was consistently in the top three for both men and women in the four different kinds of cancer studied. Britain tended to rank about 20th.

For example, a woman with breast cancer is 88% more likely to die within five years of diagnosis in Britain than in America. A man with prostate cancer is six times as likely to die within five years in Britain than in America. For various types of colon and rectal cancers, both men and women are 40% more likely to die in Britain than in America within five years of diagnosis.

The reason for this difference is twofold. First, Americans are more likely to get tested, thanks to the lack of rationing, and therefore the cancers are likely to be diagnosed sooner. This naturally makes them more curable. Second, unrationed American healthcare throws a ton of money at cancer, relative to Britain. If one uses a linear programming-style health resources rationing system as the NHS does, cancer is a very poor use of resources.

This is therefore not a criticism of the NHS. The NHS is actually fulfilling its mission–which is to make maximum cost-effective use of the resources at its disposal–and not failing at its mission as some in the United States have been suggesting. But the NHS is failing in terms of the American medical mission, which is to maximise life regardless of cost, something only a system developed in the virtual absence of rationing can accomplish. The reason cancer diagnoses are the main example that American critics of the NHS bring up is that this is where the difference in mission statements is likely to produce the most disparate results. As diseases go, cancer is a very expensive one to fight in terms of extra years of life.

The third main service obtained from the higher cost of the American system is “extra spending at the end of life”. President Obama has noted that half of all American healthcare spending occurs in the last year of life. As an admirer of the NHS-type system, he gives that as an example of the wastefulness of the current arrangement. The corollary of his observation, which he is too astute a politician to say, is that if we simply all agreed to die a year earlier, we could cut our healthcare costs in half. Of course, that would also require an unattainable omniscience on the part of the medical community about whether we really were in that last year or not.

American medical practice does tend to prolong life at its end in a way that would strike anyone operating in a system with resource constraints (such as the NHS) as somewhat bizarre. Unless otherwise instructed, medical personnel will resuscitate a terminally ill person who has stopped breathing, defibrillate them if their heart has stopped and even operate on an individual who is infirm if it might “help”.

We are developing legal means in America of having the elderly and their families make decisions about these issues before the need arises. Because America has shown that a healthcare system left to its own devices in the absence of rationing will do almost everything it can to extend life.

Again, these three “advantages” to the American healthcare system may or may not meet the reader’s idea of being sensible, but they are real. Far from being “cruel” in rationing by price, the lack of rationing in the American system is arguably almost too kind. It will not be that way for ever. We in America will have to find a way of doing more rationing of healthcare in a politically acceptable way. It will not be easy and, as of this writing, it is highly unlikely that whatever passes of Obama-Care will be a significant step in that direction.

On the other hand, my suspicion is that Britain is on its way in the opposite direction. Avoidance of the NHS is beginning to catch on by those who can afford it. One cannot blame folk for avoiding the queues or taking advantage of life-prolonging medicines when they are ill or near the end of their days.

Politicians in both parties in Britain have chosen to make the NHS sacrosanct lest it become “American”. For budgetary reasons they are probably wise to perpetuate the delusion in the media about people not getting care on my side of the Atlantic.

The irony is that this will lead to less equal provision of health services in Britain than in America. When nearly everyone gets generous coverage through insurance as in America, the extra “buying power” available to the rich or well connected is quite small. But when the public gets a highly rationed set of services determined by bureaucratic rules, the ability for the elite to buy their way around the queue or obtain a lifesaving medicine that the NHS does not provide is enormously valuable.

One of the big questions angry constituents have been asking their congressmen about the new “government option” that will substitute for many people’s private insurance under Obama-Care is whether the congressmen will put themselves on the government plan. So far there have been no takers.